New CVM regulation governing FIAGRO will streamline the market

The Brazilian Securities and Exchange Commission (“CVM”) published CVM Resolution 214, which establish the definitive regulation for Investment Funds in Agroindustrial Production Chains (“FIAGRO”) and made additional adjustments to the regulations applicable to investment funds.

In summary, the new regulation provides new opportunities to the industry by expanding the scope of FIAGRO and unlocking its potential. FIAGRO was created in 2021 to provide liquidity to the agroindustrial chain and potentially become the key mechanism within the organized capital market for this purpose.

Overview

The new regulation provides FIAGRO with the necessary tools to effectively fulfill its potential. Previously, this was not possible with the CVM’s transitional regulation applicable to FIAGRO – CVM Resolution 39 –, which required FIAGRO to apply the same limiting rules for asset composition applicable to other existing fund categories. Such provision compartmentalized the assets that could be purchased by each FIAGRO and subjected them to portfolio restrictions of other fund categories with a more restricted set of target assets.

Thus, the key aspect of the new regulation is what the CVM has strategically chosen not to regulate: the scope of the term “agroindustrial production chains ”.

By analyzing the development of Agribusiness Receivables Certificates (“CRA”) and Agribusiness Credit Rights Certificates (“CDCA”) – introduced by Law No. 11,076, of December 30, 2004 –, the extent of their use was primarily the result of a more comprehensive and integrated vision of the agribusiness activities, supported by the CVM as regards the analysis of the offers under its jurisdiction. Within this context, the importance of distinguishing the activities carried out according to chronology –  “before”, “during” and “after the gate” – was duly clarified, so that these instruments are not restricted to rural production, which is already addressed by the Rural Product Bond (“CPR”).

Law No. 11,076 defines these activities as “production”, “commercialization”, “industrialization”, and “beneficiation” and provides for each product and by-product.

This rationale can also be adopted for FIAGRO, considering that, in addition to taking advantage of the scope of the expression “agribusiness credit rights”, this fund can go beyond investment in terms of “credit rights” and concentrate on “agroindustrial production chains”, whose meaning does not always require the presence of a rural producer or their cooperatives – which can be a challenge under Law No. 11,076.

Key topics addressed by Normative Annex VI to CVM Resolution 175

“Multimarket” FIAGRO

The key innovation introduced by the new regulation is the increased flexibility provided to assets eligible for investment by the same fund. Under the experimental regime of CVM Resolution 39, each FIAGRO was restricted only to the assets admitted to the portfolio of the allocated anchor category (i.e., Equity Investment Fund – “FIP”, Credit Rights Investment Fund – “FIDC”, or Real Estate Investment Fund – “FII”), without the option of combining assets that were exclusive to other categories within the same portfolio, except for a few exceptions due to the hybrid nature of the FII.

With the new regulation, FIAGRO can invest, through the same class, in different assets originating from the agroindustrial chain, without restrictions to a specific fund category, as provided for in Article 14 of Normative Annex VI. Thus, FIAGRO can now combine, for example, direct investments in rural real estate and agribusiness credit rights within the same investment policy, which was not possible in the former regime.

Subsidiary application of regulations

As investors can invest in rights in rem over real estate, credits, and equity within the same FIAGRO, the emerging question is what regulatory regime must be observed (also to maintain the consistency of the fund’s regulatory system and avoid regulatory arbitrations).

If the class investment policy allows the investment of more than 50% of the fund’s equity in assets pertaining to another investment fund category, there will be a subsidiary incidence of the regulations of such category. During the public hearing, this parameter was set at 1/3, which generated a theoretical (and challenging) landscape of simultaneous observance of three sets of regulations, including conflicting provisions in a few cases.

With the newly edited resolution, for instance, a FIAGRO that invests more than 50% of its class in credit rights will be subject to Normative Annex II, which addresses the FIDCs.

Within this context, if an asset is subject to the regulation applicable to more than one fund category, the regulation must expressly indicate the applicable fund category.

Regarding the investment policy, there are two situations in which the regulations of Annex VI will prevail, as follows:

• If FIAGRO foresees investments of more than 50% of its equity in its own assets pertaining to another category of investment fund; and if there is a conflict between the regulations of Normative Annex VI and the regulations of another fund category.
• If FIAGRO does not provide for investments of more than 50% of its equity in its own assets pertaining to another category of investment fund.

Rural real estate and guarantees

Another interesting point—which has evolved in relation to what was proposed in the public hearing—is the possibility of investing not only in rural real estate but also in “rights in rem over rural real estate” and “real estate credit rights over rural real estate.”

In addition, in the definition of rural real estate, the CVM adopted a broad concept, which encompasses:

• Real estate under a Rural Real Estate Registration Certificate (“CCIR”) and, consequently,  subject to the Rural Real Estate Tax (“ITR”).
• Real estate located in the urban area, provided that it is intended for carrying out activities involving the agribusiness production chains.
• Real estate with a non-marine, natural, or artificial water reservoir for fish farming or aquaculture activities.

In any case, the corresponding real estate must be registered with the corresponding real estate registry.

In addition, the same regulation, recently applied to the FII, was extended to FIAGRO in relation to constituting guarantees by the fund. In line with the provisions of Law 8,668, FIAGRO can bail, endorse, accept, or jointly undertake any form, and create liens over the real estate included in its portfolio, which simplifies certain structures previously adopted and unlocks opportunities for further leveraging these funds.

Non-standardized credit rights

During the term of CVM Resolution 39, registering FIAGRO-Credit Rights in the FIDC-NP category was not permitted, as this was aimed at investing in non-standardized credit rights.

With the change in FIDC-related regulations, within the scope of CVM Resolution 175, the FIDC-NP ceased to exist, since Annex II defines non-standardized credit rights and further modulates the maximum level of exposure by investor type (general, qualified, and professional investors).

The new FIAGRO regulation removed the existing restriction and now follows the regulation applicable to each fund category provided for in the other annexes of CVM Resolution 175, in particular, the FIDC regulation, which allows investments in non-standardized credit rights within limits of 5% (general public), 10% (qualified investors) and 100% (professional investors).

Agribusiness Carbon Credits and Decarbonization Credits (“CBIOs”)

Also, within the scope of the carbon market, FIAGRO will be allowed to invest in agribusiness carbon credits, defined as “securities representing the effective reduction in the emission or removal of greenhouse gases from the atmosphere, under the terms of the specific legislation and regulation, originating from the activities of agribusiness production chains”.

In addition to agribusiness carbon credits, another innovation was the inclusion of CBIOs, which are negotiable financial securities that represent the reduction of greenhouse gas emissions in the fuel sector, issued by producers or importers of biofuels as part of the RenovaBio program.

It is worth highlighting that the definition of “agribusiness carbon credits”, for the purposes of FIAGRO, is different from that for “carbon credits” provided for in the normative annex to the Financial Investment Funds (“FIF”) of CVM Resolution 175, given that:

• Within the scope of FIFs, these credits are included in the general concept of financial assets and are restricted to the regulated market (without addressing the voluntary market).
• As for FIAGRO, there was no automatic equalization of CBIOs and agribusiness carbon credits to financial assets for the purpose of framing them in the list of assets of Art. 20-A, section III, of Law 8,668, which does not prevent such equalization from occurring, especially for tax purposes, because, depending on their qualification, there can be, according to the CVM, an “impact on the enforcement of the law under discussion by the tax authority, which must be taken into account by the manager while creating the fund’s portfolio”.
• The origin of these credits must be the activities of agribusiness production chains.
• These credits have no restrictions in the regulated market.

The new regulation further provides flexibility and allows FIAGRO, in addition to negotiating carbon credits, to originate carbon credits from rural real estate integrating its asset portfolio. Thus, FIAGRO can carry out more flexible operations within the scope of these assets than FIFs.

Instruments under physical settlement

Another highlight is the provision—in FIAGRO’s monthly report—for instruments under physical settlement, such as the Rural Product Bond (“CPR”) and the Agricultural Deposit Certificate and Agricultural Warrant (“CDA/WA”).

It is not the first time that the CVM has recognized the existence, regarding funds and securitization, of assets whose settlement can occur through goods or rights. In agribusiness, such a provision in the FIAGRO regulation is relevant because this industry involves extensive barter dynamics.

Investments in liquidity assets and derivatives

As with the FII regulation, Normative Annex VI allows the FIAGRO class to invest funds in fixed-income investment fund quotas and fixed-income securities exclusively for the purpose of liquidity and compliance with class obligations. The CVM considers that, in addition to addressing the class’s cash needs, such investment is justified by enabling the FIAGRO operation and, consequently, the financing of agribusiness production chains.

In line with this, Normative Annex VI allows the investment of FIAGRO funds in derivatives aimed exclusively at protecting the asset portfolio (without exposure to capital risk). In addition to noting that the hedge operation is not an investment but a tool for asset protection, the CVM reinforces – through the public hearing report addressing the regulation in question – that this mechanism also serves to contribute to the development of agribusiness production chains, thus justifying the permission granted by the regulator in this regard.

Investment in Index Funds (“ETFs”) and FIAGRO quotas

Another important highlight is the explicit provision, in the list of assets described in Article 14 of CVM Resolution 214, for the option of acquiring “class quotas investing more than 50% of their net equity in the assets referred to in items I to VI, which includes other FIAGRO quotas, but is not limited to this fund category”.

Such inclusion allows FIAGRO, for instance, to invest in quotas issued by other FIAGRO classes and issue ETFs dedicated to the “agroindustrial production chains” in compliance with the tax impacts.

Other topics addressed by CVM Resolution 214

Resolution 214 amended specific provisions of Annex III relating to the FII. In addition to revoking the article that addressed proxy requests for representation at shareholder meetings—now provided for in the general part of CVM Resolution 175—Article 6 was amended to correct an error concerning the voluntary public offering procedure for acquiring quotas (“OPAC”).

The term “repurchase” has been replaced with “voluntary public offerings” in the excerpt addressing the acquisition of quotas  by the closed class that issued them. This process is subject to the regulations and operational procedures established by the managing entity of the organized market in which the quotas are admitted to trading and must not be confused with a repurchase operation. Also, Annex Normative VI incorporated the same regulation for FIAGRO.

Effectiveness

• CVM Resolution 214 enters into force on March 03, 2025, except for the amendment concerning the OPAC regulation for FIIs, which enters into force on November 01, 2024.
• The adaptation of existing FIAGROs is expected to occur until September 30, 2025.

Demarest’s Capital Markets, Investment Funds and Resource Management, Agribusiness, Tax, and ESG teams are available to provide any clarifications as may be necessary.